Kindle Unlimited: publishers as collateral damage?

At one time there was only the Kindle.

Then came the Kindle Fire and Amazon Prime.  Now there’s the Fire phone and Kindle Unlimited–all five programs (along with a bunch of smaller ones) launched by Amazon (AMZN) to bind customers ever closer to the shopping service and get them to buy more stuff through it.

For AMZN, it’s not that important that any of these be moneymakers straight out of the box.  That can always be straightened out later, when the customer has been transformed from a buyer of X who happens to use AMZN to an AMZN customer who happens to want to buy X.

Kindle Unlimited, the just introduced subscription service for e-books and audio-books, is a particularly interesting instance.  That’s because it may end up being the tipping point in AMZN’s favor in its long-running battle with the five big publishing houses for control of the English-language book reader.

Another intriguing aspect of Kindle Unlimited is that AMZN has more relevant information, I think, than any other party at the table–but it isn’t talking.  So analysts, both the Wall Street kind and the planners inside the publishing companies, have less than normal to work from as they create their castles in the air.

Here’s how I view the situation:

1.  For $9.99 a month–about $120 a year–Kindle Unlimited lets subscribers read as many e-books as they want, from a collection of over 600,000, as well as to listen to as many Audible audiobooks, from a list of “thousands.”

No titles from the big five publishing houses are included, although, for example, all the Harry Potter books are.

The rollout of KU suggests that the very public spat between AMZN and Hachette, the smallest of the big five, may have been aimed at persuading Hachette to take part.

2.  Most industries exhibit a “heavy half.”   The idea is that, say, 20% of the purchasers buy a huge amount, usually put at 80%, of the stuff.  For e-books, only AMZN knows what the exact proportions are.  My guess is that heavy users easily spend $50 a month ($100+?) on e-books.  For them, signing up for KU is a no-brainer.

3.  It seems to me that KU users will dig deeper into “free” content in the 600,000 titles instead of buying expensive bestsellers launched by the big five.  Presumably, AMZN has surveyed the heavy half, and maybe even run small tests to figure out what will likely happen.  Certainly AMZN must believe that KU will redirect a lot of e-book use away from the big five and toward AMZN self-published content, or content from smaller presses that may sign up.

4.  Until yesterday, I hadn’t looked at AMZN’s financials for years.  From my perusal, I’ve decided, for no particularly good reason, that AMZN makes $60 million in operating profit per quarter from e-books in the US.  The company could easily let that drop to zero, as sales of high-priced best sellers wane. However, AMZN seems to be indicating–who knows whether bluster or not–that it is willing to go deep into the red to get KU off the ground (remember, AMZN is generates about $5 billion in yearly cash flow, so it can afford to lose money on KU for a l-o-o-ng time).  Last night it guided to a possible operating loss of over $800 million for the coming quarter.

5.  The big five could be squeezed in a number of ways.  KU users switch away from them, constricting their cash flow.  Fewer pre-orders from KU users would mean new titles fall off the bestseller lists, hurting sales further.  Authors complain about diminished royalty payments and ponder self-publishing through AMZN themselves, where, for sales in the US, the author receives 70% of the sales price vs. 25% from the big five.

6.  AMZN has lots of customer information; the publishers probably have much less.  Therefore, this negative money cycle may end up being much larger than the big five anticipate.  One or more may break ranks.

It will be interesting to see how this plays out.

 

 

rent vs. buy: digital goods

My daughter, who’s very interested in digital goods, suggested that I write about them.

Why?

They’re new, and they’re different.  Also, Laura supplied a lot of the information in this post.

Part of the difference between the digital goods we have now and their physical counterparts is in the nature of the beast(s).  Part, however, comes the desire of sellers–particularly Apple–to recreate the AOL-style “walled garden” that tethers the buyer to a given seller’s product line and secures fat profits for the retailer.

Some examples:

Generally speaking, for digital goods like e-books, or songs or movies, you don’t really own the digital copy you download.  You only have a license to use it.  Kindle owners found this out early on.  Amazon was inadvertently distributing 1984 without having bought the digital rights.  When the company found out–presumably when the rights holder called asking for money–Amazon simply went “Poof!” and made the book disappear from all the Kindles it had appeared on.  Apparently very few of the shocked Orwell fans had read the fine print in the Kindle service agreement.  It is kind of funny, though.

Usually, you can’t give your download to someone else.  You may be able to lend it for a short period of time, but maybe not.

The digital good may appear on all of your devices.   …or it may appear just on all your Android devices but not Apple, or vice versa.

 

The most peculiar aspect of digital goods, to my mind, is what happens with e-books in (if that’s the right word) libraries.  Many authors or imprints won’t sell e-books to libraries, so the selection is limited.  At least some sellers place counters in the downloads, so that the copy disappears after a certain number of borrowings.  It isn’t a quality control issue–a worry that the digital copy has somehow degraded;  it’s to mimic what happens to physical books, which eventually fall apart after repeated use.   In other words, it’s to force the library to pay again after a certain number of uses.

 

investment significance?

Maybe there’s none.

On the other hand, I think we’ve got to distinguish carefully between essential characteristics of digital goods and those that are a function of sellers’ desire to create closed “ecosystems.”  After all, the AOL walled garden lost any allure it had (I never got it) when people discovered there was a big wide world outside the AOL server farms that AOL got in the way of people experiencing.

I suspect the same will eventually happen with Apple–personally, I think this might be happening already.  As/when this occurs, I’d expect the price of digital goods in general to fall (maybe a lot).  A sharp separation will probably also emerge between high-quality content, whose unit sales will increase (again, maybe by a lot), and me-too content, which will disappear.